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The Truth
About Used Car Prices
By Bob Elliston
Before you buy a used car from a car dealer, you should understand a little about
pricing. A franchise dealer with a used car operation will usually price his cars
at a certain percentage more than what the car is deemed to be worth on the wholesale
market.
The wholesale
value of a car is usually determined by factors such as the demand for the car
coupled with the age, make, model, options, mileage and general condition. The
dealer's markup on a used car, van or pickup is frequently determined by any or
all of several factors: The
price the dealer paid to acquire the car. He might have taken it in trade against
a new car – which means that he accepted the car in lieu of cash or he might
have purchased it from a private seller, wholesaler or at auction.
The dealer
adds what it has cost him to repair and recondition the car.
The dealer adds
a markup to cover his profit objectives and to pay for his overhead.
The
markup also will reflect such things as the condition of the car, mileage, make,
model, options and most important, market demand. The point, simply, is that used
car markups will vary greatly for any number of factors. Your objective is to
discover the dealer’s cost to buy and recondition the car and put it on his
lot. That will give you the basis for planning your negotiation.
Tricks of the Trade
Many dealers also will include a "negotiation
pad" in their markups. They recognize that most people won't buy a car –
new or used – unless they feel they're buying it for less than the advertised
price. So a dealer will build in a large enough cushion to give the buyer a discount
and still end up with whatever he considers to be a reasonable, or maybe even
a more than reasonable, profit.
The
key to a dealer's survival and profitability in the used car business is to buy
used cars at or below what the industry calls the "wholesale price"
and then to sell them at a retail price that, in the final analysis, is whatever
a buyer will pay. Here
is an actual example: I tracked a GM car that was purchased by a dealer for $9,500.
After spending $400 for repairs and reconditioning, he put it on the lot
at $13,800. That's a markup over his purchase cost of more than 45 percent! The
used car sales manager confided that this markup gave him built-in room for negotiation.
A buyer finally appeared and, after a negotiated agreement, bought the car for
$12,450. The customer felt he got a good deal and the seller said nothing to disabuse
him of that notion. Whether
you buy from a private owner or a dealer, one of the most important pieces of
information you can obtain is the current "wholesale" price of the car
in your area of the country. One source of auto price information is the car loan
department of your bank. They usually will have all the latest price books and
possibly even auction reports that show what various makes are bringing on the
auction market. Book
Prices
The industry uses any of several books as price guides: The NADA Official
Used Car Guide, National Auto Research Black Book, Kelley Blue Book Auto Market
Report and Galves Auto Price List. These books – also available online –
purport to reflect the average wholesale prices that various cars are bringing
across the country. The only problem is that they usually don't agree on a set
price. Compare
the suggested wholesale prices for a 2000 Chevrolet four-door Lumina from the
same month: Kelley
Blue Book: $7,875 (tends to reflect west coast prices) NADA:
$6,875 (combination of auction and dealer reports) Black
Book: $5,650 to $8,850 (dealer auction sales reports) You
can find used car price books on your newsstand or on various Internet sites,
such as Edmunds.com. For example, Edmunds’ wholesale price for a 2000 Lumina
is $7,387. Its figures provide a general range but may not present a true picture
of any given car's "real" price because it cannot account for the myriad
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